Tax-free investments were introduced back in 2015 by the South African Government, however many South Africans are still unaware of them, unfamiliar with the benefits or don’t know how to maximise this unique investment opportunity to its full potential.
Tax-free investments were introduced to encourage South Africans to save and as a result, all of the proceeds from tax-free savings accounts (TFSAs), including interest, capital gains and dividends are exempt from tax.
Tax-free savings are designed to reduce South Africans’ tax liability while allowing them to save for their non-retirement goals.
It also provides flexibility as you do not have to commit to making future contributions and you can withdraw funds anytime you choose, but it’s not advisable to do so as this will have an impact on your lifetime tax-free savings limit. Once an amount is withdrawn, that amount will be deducted from your lifetime contribution limit.
The amount you can save in a tax-free savings account is limited. Total annual contributions may not exceed R36 000 during one tax year, while lifetime contributions cannot exceed R500 000. As long as the amounts you put into the account do not exceed the annual or lifetime limits, it does not matter how much growth you earn on your annual contributions.
A tax of 40% will be payable on contributions to your tax-free account that exceeds the limits.
It is therefore important to monitor all your tax free investments regularly to avoid exceeding the limit.
Investments may be made in fixed-term bank accounts, money markets, unit trusts, JSE-listed trade funds, and other types of investment accounts.
In accordance with the National Government, tax-free investments may only be provided by licensed banks, long-term insurers, managers of registered collective schemes (with certain exceptions), National Government, mutual banks, cooperative banks, South African Postbank, administrative financial services providers, and persons authorised by a licensed exchange to perform securities services.
While there is no doubt that tax-free investments should play a role in an overall investment portfolio, the role of these investments should be tailored to the specific needs of each individual. The withdrawal rules of tax-free investments may make it more suitable for you to consider other short-term investment products first if you do not already have any other savings or investment products.